Quarterly Overview and Strategies to End 2014; Social Security Hikes

During the third quarter, stocks, bonds, and commodities decided to part company performance-wise, resulting in a very mixed bag for investors in moderate growth and balanced portfolios. The large stocks (S&P 500 Index) managed to eke out a small gain of +1.13%, and that was about the only bright spot with stock-based market indexes. Mid-capitalization stocks fell 4%, Small cap stocks, -7%. Bonds were a brighter spot, as longer-term bonds gained 3%, while shorter durations were breakeven. Overseas markets did not help US investors much either; developed markets were off 6% and emerging markets down 4%. So far in October, which historically is the worst month to stay in the stock market, large stocks are +1%, while smaller stocks are ahead a tad over 2% not bad with four days to go!

Commodities across the board of grains, metals and energy moved lower in the quarter. In fact, consumer prices fell 0.2% in August, a first in 18 months! Energy, natural gas, gasoline all contributing – finally a break at the pump I say. I bought gasoline in South Carolina mid-month for $2.74. The year-over-year gain of inflation registered a +1.7% thru September, so that’s an important figure to have in hand. Why? Because, interest rates are very low, and safer, fixed income investments are not covering the rise in consumer prices. Some are, but you won’t find them at your local bank or credit union. It’s my job to find investment vehicles that can beat the inflation bogey without undue risk to invested principle. Read on.

 

Where to Look, What to Consider Now

I am finding some value with no risk to your principal in 3 to five year CD-type fixed annuities at rates between 2.3% to 3.15%. These are fixed and guaranteed rates with tax deferral until you cash out, and they will cover some tax and inflation along the way. Consider them as part of your "safe money" savings.

 

If you are inclined to a bit more risk in the stock and bond markets, or have retirement plans that hold the same, then you should consider re-balancing your funds to reduce risk of loss. For instance, year to date, a 100% stock portfolio is ahead about 8%, while a portfolio diversified between stocks, bonds, cash and precious metals is up 7% - with less risk and less drawdown in your account value. Ask me if you need a portfolio review; it could be very worthwhile and profitable to understand this tool at your disposal.

Social Security News for 2015 Beneficiaries, click on:
http://finance.yahoo.com/news/5-social-security-changes-coming-141022186.html

 

Stay tuned as we enter the last 10 weeks of 2014. I promise to get the news out to you in faster fashion the next report.

Thanks for reading, and stay safe and healthy!

~Barry

www.stetsonwealthmanagement.com
 

Barry L. Unterbrink
Chartered Retirement Planning Counselor
(954) 719-1151
(954) 642-2253 fax
Fort Lauderdale, Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Will I Run Out of Money in Retirement ?

My Retirement - Will I Run Out of Money?

Most likely, our greatest fear as we are nearing or in retirement can be stated in 8 simple words; "Will I run out of money in retirement?" I can see the wrinkled nose and sweaty palms start to kick in as the stress levels rise after someone asks that question. Moreover, it's not an easy quantifiable answer. It's better addressed as "it depends" since it is dependent on various moving parts such as interest rates, inflation, withdrawals, etc. that muddies the income and savings waters.

As a Retirement Counselor, I have to sit back, take a deep breath, and then start to outline the events and circumstances that "could" result in a shortfall of money during your retirement. In this blog post, I will explain a few of these, along with some 'traps' and 'potholes' to look out for on the road to (and in) retirement.

First off, "running out of money in retirement" needs a proper definition. Do you mean running your investments and savings plans to zero? Or do you mean running out of INCOME that those investments can produce? Or is the better question still, "will my current lifestyle be reduced in future years by my choice of investments today", or "how can my current plan to live in retirement be re-worked so I increase my odds of not running out of money" You have to be specific with your question to allow your advisor to give you a more specific answer based on the rules and historical outcomes.

Once your question is framed in an accurate manner, next you must consider what you are comfortable with doing. What is your experience, temperament and willing risk level? Follow me here. If you're a saver and like bonds and CD's, and think stocks are risky, then say that. If your retirement plan owned mutual funds and they worked out, then you can stomach some risk of owning stock-based investments . Where I find most investors get side-tracked is when they do things that are really against their nature or experience, and they allow emotions to color their thinking. Also, they don't think things through money-wise or they think too much and change their strategy too often so that no undertaking has a chance at success. Let's look at some numbers and options that could help you with your retirement planning.

Consider a retirement portfolio (IRA, brokerage account, etc.) that contains $50,000 in bonds and $50,000 in stocks. The stocks are high quality and pay dividends equal to 2% per year. The bond portion pays 5% in interest income. So that's $1,000 from stock dividends plus $2,500 in bond dividends totaling $3,500 income per year. Not bad; that's close to $300/month in income. If the bonds and stocks continue to pay, then it's fairly safe that your income will stay level, or even rise over time as the stock companies increase their dividends if business does well.

Appreciation vs. Income: I think where investors go awry is when they confuse 'appreciation' with 'income'. Appreciation is the rise in value of a stock, bond or mutual fund. Income is the earning of dividends or interest from a stock or bond or mutual fund. From my example, what could happen to de-rail your efforts and lead you to running out of money prematurely? Answer: Spending more than you earn.

Suppose your stocks go up in value 25%, to $62,500, and the bonds stay at $50,000. Now you have $112,500 total, right? You may think - OK, now I'll take $1,000 more from my account each year since I've made some money in my stocks - you now take $4,500, or
$375 a month. Whoa there big spender! Where are you getting the extra $1,000? You have to sell some stock(s) or bond(s) to get it ... you are now spending your principal, since your dividends and interest are still $3,500 per year. Spending beyond what your portfolio
earns is spending your principal. For every $1,000 in stock you sell, you are reducing your future income by $20/year (2% of $1,000, and $50/yr. for every $1,000 in bonds sold). It's emotionally warm to think that way in a bull market, but how 'bout when the 25% bear
market hits, (we just had one) and your account is now down to $87,500 ($50,000 bonds + $37,500 stocks). De-rail your retirement pothole #1: you will never run out of principal if you don't spend any. Rule: 1a: If you decide to spend principal in the good times, be
prepared to stop spending principal in the bad times. Remember: income from dividends and interest is fairly stable. Appreciation from stocks and bonds is not stable, and cannot be relied upon year to year. Better idea: when stocks rise, move some of that appreciation (gain) to the bonds; now you will earn more income - 5% from the bonds vs. 2% for the stocks.

Taxes and Inflation: The second area of real importance ignored by most investors and the investment companies is the effects of inflation and taxes on your retirement
money. It's what you keep that counts. We all hate taxes and the darn tax code is changed so often by Congress that hardly anyone can keep up with it. Inflation is a bit easier to figure out. To keep the example easy, say you are earning 5% on your combined stock
and bond portfolio. Taking 15% in taxes away, you now earn 4.25%. Now subtract 3% inflation, and you're left with 1.25% - not much of a gain now, is it? De-rail your retirement pothole #2: be aware of the inflation and tax hits that will occur when you design your retirement income plan.

Maximum withdrawal rates. Multiple studies on this topic have been penned in the last 25 years, and the consensus is a 4% to 4.5% rate of withdrawal would prevent running out of money during a 30 year retirement time frame using 50% stocks/50% bonds. This plan does not consider principal vs. income like above. You take your starting account value and withdraw 4 -4.50% year after year. Another plan I have seen put forth is to withdraw your portfolio's total return (appreciation + income) after subtracting the inflation rate. For instance, your portfolio gains 10% for the year (8% appreciation + 2% income); you can withdraw 7% that year. Why? Because if you earn 10% and inflation is 3%, then you are leaving that 3% gain in the portfolio to offset inflation in the portfolio that you will need next year. That would take some mental math on your part, because you would adjust your income each year depending on your portfolio value and the cost of living (inflation) from the prior year. Where this plan could backfire is when your portfolio loses money, such as last year, so that no withdrawals would be taken. Can you put your retirement income on hold and await better times-probably not. De-rail your retirement pothole #3: Be flexible; work out more than one plan for your retirement income, using more than one portfolio or investment.

Finally, remember - I've used one example of a 50%-50% portfolio mix today. You may own other investments that guarantee your income, such as a pension, social security or an income annuity. The safer the guarantee, the more choices you will generally have with your remaining investments.

Reply to this blog by clicking on the comment link below, or send me an e-mail to: barry@stetsonwealthmanagement.com

I hope you've gleaned some useful information today.

Barry Unterbrink
Chartered Retirement Planning Counselor; Portfolio Manager
(954) 719-1151

 

Retirement Planning Deadline Looms Tonight

15 April 2014

The Government imposed deadline for contributions to most retirement accounts, IRA's SEP-IRA's, is tonight. Most brokerages and banks will allow you to set up your account on-line, and fund it
at the same time. However, if you cannot accomplish that today, and still need more time, you can most likely mail  your contribution check to your custodian or brokerage. At Fidelity Investments, for example, if your envelope is post-marked on April 15th and received by April 30th, they will credit your IRA contribution for 2013. Retirement accounts should act as a long term savings that will (hopefully) grow and provide you with income when you retire someday.

I hope you can benefit from this advice today.

Barry Unterbrink, CRPC
Fort Lauderdale FL
(954) 719-1151